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— Deals —
After a whirlwind bankruptcy process, managers of the enlarged company, which has taken the name Silicon Graphics International Corp., are rolling up their sleeves to figure out exactly how to gain the most advantage, both strategically and financially, for the former Rackable. It's not a simple task. When the deal closed, the 300-employee Rackable suddenly had 1,100 more employees in 25 countries and several new businesses, including high-performance computing, services and federal government contracts. "It's very challenging, but in a good way," says senior vice president and chief financial officer Jim Wheat. "It puts the ball in our court, and now we have to go, as a management team, and execute."
Much has been written about the fall of Silicon Graphics, the legendary maker of high-end computers formed in 1981 by Netscape Communications Corp. founder Jim Clark. It made its name building workstations that produced three-dimensional graphics responsible for the special effects in films such as "Jurassic Park," "Terminator 2: Judgment Day" and "Forrest Gump." Earlier this decade, the Mountain View, Calif., company spread out in too many directions, fell victim to stiff competition from increasingly powerful PCs and overleveraged its capital structure. It entered bankruptcy for the first time in May 2006 after burying itself in $664 million in liabilities. It exited Chapter 11 in October 2006. While its high-performance computing systems have carved out a recognized position in climate-change computations, defense and other applications, competitors including Hewlett-Packard Co., IBM Corp. and Sun Microsystems Inc. made existence tough for Silicon Graphics, and it filed for Chapter 11 again on April 1. Ten-year-old Rackable, which focused on servers and storage systems for data centers, saw an opportunity but had to move quickly. Hastened by the bankruptcy process, the deal come together at a blinding pace and forced Rackable to make quick decisions. The company received court approval on April 30 and was required to close the deal by May 8. The rush to closing precluded a lengthy process to determine the enlarged company's brand strategy, among other things. "We didn't have the luxury to do extensive research on what would happen, but we were blessed with two good brands," says George Skaff, SGI's chief marketing officer. "SGI was the best brand out there. The company might have been tarnished operationally, but no one can argue with the SGI brand, as it is quite accepted by the industry." The speed of closing, new fair-value accounting rules and SGI not having filed financial reports since December challenged the management team's ability to tell Wall Street what the deal would mean financially for the new company. "We're not putting out a model yet," Wheat says. What Wheat and CEO Mark Barrenechea have told Wall Street is this: In calendar year 2010, the combined company expects to post roughly $500 million in non-generally accepted accounting principle revenue and gross margins in the 20s. The former Rackable acquired $28 million in cash, accounts receivable of $20 million, inventory with a book value in the range of about $50 million to $55 million, real estate, fixed assets and a substantial patent portfolio. The bankruptcy washed away about $150 million of secured debt. If all goes well, SGI will succeed in expanding the company's product offerings and customer base while imposing the "extraordinary urgency and discipline in spending" that characterized Rackable, Wheat says. Wheat joined the former Rackable a year ago from chip equipment maker Lam Research Corp.; Barrenechea, who held executive positions at Oracle Corp. and CA Inc., took the CEO role in 2007. Though it happened under different management, Rackable fumbled its previous acquisition. It paid about $50 million for Canadian storage technology company Terrascale Technologies Inc. in 2006. Despite a "great deal of effort and resources," Rackable was unable to turn the acquisition into a revenue generator and exited the business last year, the company said in a regulatory filing. Wheat says he came on board as CFO partly because Barrenechea intended to put Rackable's cash to work striking acquisitions. With the SGI deal, he will be busy for a while. "We have our hands full as a management team for the foreseeable future, integrating and operating this company," Wheat says. Comments |
Server maker Rackable Systems Inc. had only eight days last month to close its $42.5 million acquisition of computing legend Silicon Graphics Inc., which it bought out of bankruptcy. Now comes the hard part.
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if by the term "Legend" you mean screwing over common stock holders via bankruptcy proceeding, tehn yes, I am sure that the SGI legend is alive and well. Don't say you haven't been warned, Mr. Future commonstock holder!